china confidental
Monday, May 04, 2009
Wall Street's Dirty Little China Business Secret
Now it can be told: many Chinese compaines that raised capital in the United States, including companies that went public and traded on the electronic Over-the-Counter Bulletin Board (OTC BB) or listed on one of the national stock exchanges (NASDAQ, NYSE, or Amex, renamed NYSE Alternext after its acquisition by the Big Board), lied to investors and regulators in order to achieve their capital formation goals.
Books were cooked. Full disclosure--the basis for the entire U.S. securities law system--was really fraudulent disclosure, designed to hide controlling and beneficial stock ownership interests and secret, pre-existing, written and unwritten agreements with Chinese Communist Party officials and their relatives and well-connected companies.
In 2004-2005 the party began urging Chinese companies and entrepreneurs to go abroad for capital. The United States, eager for the business (a nation dominated by capitalists only too willing to sell Communists the proverbial rope to hang capitalism, to paraphrase Lenin) was the prime target, given its hedge funds and IPO market and the fact that the U.S. securities system, as mentioned above, is based on disclosure instead of merit. The stock exchanges have their individual listing criteria and rules; but practically any company can go public and trade on the OTC BB after clearing the Securities and Exchange Commission. Key word: clearing. The SEC does not approve companies, contrary to what many foreign investors believe; rather, the agency determines if the issuer has made full disclosure of material facts and risk factors.
It was common practice for Chinese companies to keep two sets of books, one for the owners and one for the government. The going-pubic gold rush (via IPOs and reverse mergers with shell companies) led to a new phenomenon: the maintenance of three sets of financial statements, one for the principal owners, one for the government, and one for U.S. auditors, investors, and regulators, including the SEC and the national stock exchanges, which are formally designated Self-Regulating Organizations.
That many U.S. investment bankers knew but chose to ignore the fraud in turn led a unit of the Second Bureau (dedicated to foreign intelligence) of China's Ministry of State Security to gather information and keep files on the bankers--a massive data base, according to China Confidential sources, constituting a "Black Book" of alleged Wall Street complicity in financial fraud. Click here and here for the reports.
China Confidential has received a flood of emails from irate investors in Chinese companies, charging the companies with fraud. We have also received emails from investment bankers, brokers, finders and other Wall Street money-raisers and middlemen who claim to have themselves been defrauded and cheated out of commissions and fees by their Chinese clients. We are investigating the most credible claims; and we plan to make alleged Chinese fraud and corruption an editorial focus in the coming weeks. The investigative reporting team will be led by a veteran journalist and financial public relations consultant who was responsible for exposing high-level corruption in the Soviet Union in the Brezhnev-Kosygin era. His groundbreaking series on alleged bribery of a Soviet official--a relative of Premier Kosygin--by a consortium that included Wall Street firms, two big U.S. media companies, and the chairman of a listed U.S. energy company made headlines in the U.S. and Europe.
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